Trade deficit balloons

Aug. 12, 2005, 11:44PM

Trade deficit balloons
Crude imports, economic growth are key factors in June imbalance
By JESSICA HOLZER
Copyright 2005 Houston Chronicle Washington Bureau

WASHINGTON - A record foreign oil bill helped pushed the U.S. trade deficit up sharply in June.

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The gap in trade in goods and services between the U.S. and the rest of the world swelled by 6.1 percent to $58.8 billion, the Commerce Department reported on Friday. A steep rise in imports — which hit a record $165.7 billion — drove nearly all of the increase, while exports stayed nearly flat. The trade imbalance with China reached an all-time high.

With crude prices scaling new heights — hitting $66.86 a barrel Friday — and the U.S. economy picking up steam, the trade deficit is likely to widen further, economists say.

"Unless we have an economic recession, we´re just going to see higher and higher numbers," said John Bott, chief economist of Tri-Star Financial, a Houston-based investment firm.

Oil import prices rose 7.6 percent in June, according to the Labor Department. That lifted the oil import bill to a record $19.9 billion. The price of crude at the close of trading Friday was more than 50 percent higher than the average oil import price in June.

Imports of industrial supplies and capital goods rose sharply from May, as businesses responded to depleting inventories and as investment in equipment picked up.

Imports of consumer goods, which grew only modestly, are likely to rise further in the coming months as employment gains and accelerating wage growth bolster consumer spending.

But as the U.S. economy is strengthening, the growth prospects of America´s most important trading partners are weakening, which will only exacerbate the trade gap, economists said.

The International Monetary Fund cut its forecast of euro zone growth this year from 1.6 percent to 1.3 percent. Japan´s economy may only grow by 1.8 percent, the IMF said.


China curbs on the table
The record trade deficit with China — at $17.6 billion — will be grist for politicians who want China to loosen its grip on its currency, the yuan, which they say Beijing keeps artificially cheap in order to unfairly boost its exports.

China stopped pegging the yuan to the dollar on July 21, letting it rise by 2.1 percent against the greenback. It now pegs the yuan to a basket of currencies that includes the dollar.

Despite the change, surging clothing and textile imports from China since January continue to fan protectionist flames on Capitol Hill.

Responding to pressure from textile-state Republicans in Congress, the Bush administration announced Thursday that it would begin talks with China to curb broad categories of Chinese textile and clothing imports.

But Nick Lardy, a China expert at the Institute of International Economics in Washington, argued that it is a dropoff in U.S. exports to China, rather than a surge in Chinese textile and clothing imports, that is widening the China-U.S. trade imbalance. "The textile story is a bit of a red herring," he said. "The main story here is not that China is exporting a lot more, but that it is importing a lot less."

While U.S. exports to China in the first five months of 2004 grew by 20 percent, they went up by only 7 percent over the same period in 2005.

Furthermore, a slowdown in domestic demand is putting China on track for a record surplus with the world this year, Lardy said. Chinese exports are up 32 percent in the first seven months of 2005 from the same period a year earlier, but imports are up only 14 percent.

Besides, a big trade imbalance with China is not necessarily all bad for the U.S. economy, said John Lonsky, chief economist at Moody´s Investors Service. He points out that a good chunk of Chinese exports are made by companies, like Motorola, that are based in the U.S.


Not hurting profitability
"The widening of the trade deficit is not hurting U.S. profitability as much as you might expect," he said.

Moreover, it is against U.S. interests to erect barriers to staunch the flow of Chinese imports, said Bott of Tri-Star Financial. "If we start putting tariffs on their stuff, then they are going to put tariffs on all our stuff," he said, which will dampen economic growth across the board. "All you´re going to do is shrink the pie."

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